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What Should Be The Legal Limits for Governments to Collect and Use Its Citizens’ Personal Data?

Dila Şen Dila Şen/
03 April, 2020
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Privacy concerns in China has gone hand in hand with the integration to global economy since 1980’s. Increased penetration of global brands into the economy and the WTO membership of China have resulted a shift towards nurturing privacy regulations. As WTO declared its membership, China started adapting deeper regulations on privacy (Yao-Huai, 2005). Although privacy issue has started finding a place in Chinese legal system in 1980’s, main aims of the laws has been reputation, and security rather than privacy of individuals’ lives. Therefore, any regulation that covered private life was only through the reputation concept. The interpretation of the Supreme People’s Court Regarding Issues of the Ascertaining the Liability of Compensation for Spiritual Damage for Tort (2001) clarifies the legal conundrum for infringement over private life. It granted a resolution for protection of privacy in a direct manner (Yao-Huai, 2005). Rise of internet, and mobile device usage amplified the necessity of sound data protection, and privacy legal framework. Chinese government passed several new regulations such as Decision on Strengthening Internet Information Protection (2012), and Cybersecurity Law of the People’s Republic of China (2016) yet the legal framework is still far from being cohesive, and robust in comparison to EU regulations.

1. China’s Social Credit System, Government Control

1.1. Sesame Credit and China’s social credit system

Sesame Credit can be regarded as a previous version of the China’s social credit system to a certain degree. Not only payment information, and spending habits are the most important determinants of this credit score, but also financial situation of the social milieu of the user is taken into the scoring (Clover, 2016 cited in Chen & Cheung, 2017).

China’s social credit system is a result of almost 20 years of technical and social experiments. The idea of social credit emerged in the early 2000’s due to the lack of information about the trustworthiness of the economic agents (Liu Xiaoyuan et al, 2016). As the Chinese market socialism evolves, demand for funding, and private investments has increased. In 2010, a local government in Shanghai utilized gamified and lighter version of social credit. Citizens who showed good behaviours gained positive points whereas negative behaviours caused negative scores. If the positive points are above some determined level, the local government provided awards such as promotions, access to public housing, and items from a catalogue (Creemers, 2017).

Although China’s social credit system and Sesame Credit have similar working mechanism and adaption of the big data analytics, in China’s social credit system, participation will be mandatory with heavier sanctions. According to Chen and Cheung (2017), sanctions for low social credit score include barring from civil service, disclosing the identities of low scored individuals in national credit china website, disqualifying the children of the low score owners from private schools (Liu Y et al, 2014).

2. Social Credit System and Privacy Regulations in Europe

2.1. GDPR and Social Credit System

Recent changes in law of processing personal data in Europe restrained the freely moving data in certain degrees. This change is called as GDPR (General Data Protection Regulation) which is an above state-level degree. Because GDPR sets standards for data collection and storage, even non-EU companies or institution should obey the regulations if they are operating within EU borders. In other words, any company that does business within the EU is expected to comply with these regulations. Core idea of the GDPR focuses on the creation of a data framework that minimizing the risks of harming the rights and freedoms of users (GDPR Art 24). This data framework also includes organizational and technical alterations or improvements necessary to provide services in line with the GDPR (IP Team, 2017). With this regulation user have right to be forgotten and they can restrain or block the use of their personal data.

Social credit system’s main working mechanism is to stack all the available information about the individual and to turn this information into scores by weighting some certain behaviours over others. Every commercial transaction, geolocation, and social acquaintances are stored without giving subjects right to block the information flow, to limit the data mobility or not to participate. In that sense, GDPR compliance for the social credit system is not possible. Any application of such mechanism in EU territory requires detailed procedures to take the consent of the users. Because some of the users may not accept the terms and conditions, system will not cover the whole population. Therefore, features such as social relation and consumption metrics will not be working. Besides that, China’s model of social credit system requires a central government, which is supposed to administrate the whole social credit system’ structure including reward and punishment. EU as a Union is composed of independent governments in their internal affairs therefore supra-national level governance scheme is required to handle the situations. It means that EU governance system may need to be altered.

2.2. Right to Respect Private Life

European convention states that everyone has the right to respect for his private and family life, his home, and correspondence without a state intervention except the cases of security, crime, wealth of the country, and freedom of others (ECHR Art 8). Strasbourg Court in the case of Costello-Roberts vs. the United Kingdom defines the private life in a broader way than the definition of privacy. According to the Strasbourg Court after analysing several cases (Bigaeve v. Greece, Costello-Roberts v. United Kingdom), private life encompasses social integrity, social identity, personal autonomy, awareness of the racial origins, and privacy of telephone conversations (Klass v. Germany). In addition, the court indicates that any employment restrictions due to the private life related issues could be taken to the court (Roagna, 2012). Article 8 of the European Convention on Human Rights might be the main pillar of right to respect private life in EU legal system. However, each EU states can take different stance on the application of this article. These differences are welcomed by EU convention on Human Rights in some specific margin of appreciation. In this margin of appreciation, local courts can come to verdicts, which may not fully accurate with the Article 8. According to Kilkelly (2003) flexibility on application of Article 8 enable to take regional differences between countries such as technological, social and legal developments into the account. She asserts that this flexibility window actually causes not to define privacy categorically. Dynamic nature of the technological, social and legal developments refers ever-changing meaning of private life and privacy.

Surveillance potential of the social credit system brings the state into the private sphere of the subjects. Because consumption and social interaction data of the individuals are collected, it may violate social integrity, social identity and inter-household privacy of an individual (Sykes, 1999). The key reason of violation of social integrity, social identity, and inter-household privacy is the loss of private and public sphere demarcation (Wright, 2012). Household members cannot control their public sphere image and calibrate themselves into the common values of the society by pretending, hiding, and faking. Knowing that being observed might bring extra pressure on individuals; they may develop antisocial behaviours by avoiding people who might be considered as radical, odd or different from rest of the society due to the possibility of negative influence over their trustworthiness. As a result, disrupted social relations hurt society as a whole.

Feeling of being observed may not just change social relations but also alienate the actions of people, since individuals might behave different from their true selves, some authority constructed identity would be imposed on. Monitoring will not be ceased when individuals return their homes. Gathering data on household level, like usage of electricity, water, and other utilities is enough to distress the whole family unit. Therefore, it is possible to state that implications of the social credit system do not coincide with right to respect private life mission of European court. According to Marx (2002), main social and psychological impacts of surveillance have similar impacts in regardless of the social differences. That is to say, people who feel that they are being watched may show similar behaviours. McCahill and Finn (2010), studied the impacts of the surveillance methods on young adolescences between 13-16 year olds students in three schools. Children are asked questions regarding the awareness, experience, and response to surveillance. Students were aware of being watched and some of them described school atmosphere like a prison. Besides that, surveillance in these schools enable micro-time management for teachers. Pupils who are not ready in the classroom just before the lecture are noted automatically and text messages stating the absence directly are sent to parents. Because of these text messages and micro management, pupils were no longer socialize with their peer groups in lunch or extended coffee breaks because of there is no negotiation with teacher. McCahill and Finn (2010) also find that pupils started forming resistance strategies including avoiding CCTV camera presence and buying alcohol from places where police does not go. They also emphasized that some groups showed aggressive behaviours against cameras and surveillance operators such as swearing them or damaging cameras with stones. EU courts do not intervene due to the consent of the parents to protect their children under 18. Otherwise, there are obvious violations of EU laws on social integrity and personal identity traits.

McCahill and Finn (2010) examines the impact of the extensive CCTV surveillance, yet it provides a glimpse of possible consequences of social credit system on teenagers in case of nationwide application because consumption of teenagers would be counted in the calculation due to being parenting indicator.

2.3. Social Credit System’s Reward and Punishment Structure under EU Law

Like any other authoritarian regime, reward and punishment structures of policies are important for Chinese government. So that, social credit system has a strong emphasis on the reward and punishment schemes. However, these reward and punishment schemes are not suitable for human rights, equality, and social integrity notions that are pivotal in EU laws. In this part, three sanctions of social credit system such as flight ban, employment selection, and acceptance of children in prestigious schools will be analysed. Chinese social credit system will impose a flight ban to individuals who have lower social credit score (Backer,2017). Although this flight ban does not include domestic itineraries, it reduces the freedom of movement.

From EU laws perspective, freedom of movement refers to individual autonomy that is essentially one of the core notions in EU laws and regulations (Walters & Cornelisse, 2010). However, old EU members worried about the enlargement in EU zone in 2004 due to the potential immigration flow from new member states. Most of the old states except UK, Ireland and Sweden did not let labours to work in their countries (Doyle et al, 2006). It is possible to state that, this approach aims to protect labour markets of old member states yet it renders a limitation of individual autonomy. Although, it is possible to work in old member states after finding sponsors, specific jobs for relevant skills, or temporary programs, total working permits given is less than the new member states’ EU mobilization labour supply (Ibid, 2006). Although labour laws in EU states restrain individual autonomy, none of the member states do not impose flight ban to its citizens unless there is a criminal investigation or court order. In that regard, any home country does not interfere to freedom of movement (Guild, 2017).

Moreover, it is planned that Chinese public companies and institutions will be using Chinese social credit system scores in recruitment and performance metrics. Chinese government aims to shape its subjects with these reward systems competitively (Backer,2017). The government may think that nurturing the high scored individuals causes low scored individuals to envy and it gives a motivation to increase their scores that means to fulfil required tasks. However, individuals who are fired or rejected because of their low scores, might find themselves in low-level equilibrium trap. In other words, they would be in a state that they cannot have enough financial and social capital to increase their scores. In addition to that, because of Chinese social credit system reveals private information abundantly, discriminatory actions in terms of racial, religious, social, and sexual orientation might occur more often. EU member states generally have their own recruitment mechanisms for public sector positions rather than a universal recruitment system.

On the contrary, each EU member generally uses decentralized processes to monitor candidates for selection on the regional basis. By doing so, some background checks and skill based tests are also applied. Target of these processes to select most relevant candidate to the position. Although public sector in EU does not have such approach, private sector especially financial corporations may have a tendency to screen employee’s credit records, social media history, and other sorts of private information. Credit checks during background checks are not common and they are prohibited by the laws. However, such background investigations formally or informally are more common in United States (Acquisti and Fong, 2015; Nissim, 2010; Papapolychroniadis et al, 2017).  In that regard, utilization of social credits as a reference for recruitment process in common public sector positions might not be possible under EU laws due to the exclusionary nature of the scoring. Despite that, discriminatory essence of such approach for mass recruitment, social credit scoring type of system might be a suitable approach for more strategic and important positions such as, board membership or executive committee membership in private or public sector due to the higher risks associated in the case of adverse selection.

Social credit system asserts that parents’ scores have important effect over children’s school acceptance in China. Top institutes and schools in China will not accept students whose parents have lower scores. This sort of punishment is called family punishment which refers to distribution of criminal responsibility to the household members. In tribal societies of ancient Europe and Far East, that sort of punishment has been exercised (Cohen & Amidon, 2004). Most recent examples of family punishment can be observed in Nazi Germany under the Sippenhaft (Loeffel, 2012). Alexopoulos (2008) asserts that such family punishment has been used by several authoritarian governments to extort and silence the opposition. He underlines the Stalin’s focus on elimination of kinship groups. Therefore, it might be regarded as, by taking authoritarian properties of the China’s government into the account, implementing such penal mechanism in China might be a part of social control mechanism.

Although, there is no detailed information about the score level and procedures, it might be one of the most controversial reward and punishment system because it does not only affect the owner of the score, but also other family members especially children. Directly adaptation of such reward and punishment mechanism without any change in EU countries, may create several problems. First of all, implementing such penal activity is against the fundamental doctrine of individualization of punishment, which is regarded as individualization of criminal responsibility. In conventional obligations, which are supervised by United Nations Commission on Human Rights, any criminal act cannot be associative and correspondingly any punishment should follow individual pattern rather than collective (Othman, 2005). Secondly, penalizing the parents through the children’s education does not support equality of opportunity notion. In EU, equality of opportunity is a delicate topic and it is denoted as a cornerstone of EU law and policy making (EU Commission, 2018). Especially, equity has been understood by general statistics and per capita returns by policy makers for decades. Theoretic and empiric researches in this field revealed that using opportunity rather than heuristic approaches such as statistical predictions and calculations is more accurate to state economic development based problems (Arneson, 1989; Roemer, 2009; Peragine et al, 2013). Increasing equality of opportunity in education does not only increase the overall level of education in the country, but also increases the average number of people who take higher quality of education. Hanuschek and Woessmann (2007) examines the distribution of quality education in the country and economic growth. They find that there is a positive relation between the number of students who take quality education the growth rate. They measured the quality of education by comparing the average test scores of the institutions with the regional and country average. Their conclusion is that the positive relation might stem from increased human capital. Barro (2001) examines the foundations of higher quality and quantity of schooling in terms of their contribution in human capital. He finds that higher levels of education enable labours to grasp new technologies easily. Besides that, in economic calculations, production functions (In this article, production function refers to neoclassical production function that is labour augmenting See Krump and Preissler (2000). generally have three components such as capital, labour and productivity. The latter is pretty much related with the human capital and technological advancements of the given economy. It shows that, new generations are not just important for the labour force but also important for the productivity, human capital and technology diffusion and the increase in human capital causes per capita wealth (Bowlus et al, 2005; Shapiro, 2006). Therefore, education quality and quantity increase the efficiency of technology diffusion in the labour force then obviously increase the human capital that amplifies the economic growth. Besides that, he finds that quality of education is a stronger determinant than average years of schooling. In that regard, EU policy makers may not want to jeopardize the human capital and economic growth relation by adapting a policy, which restrains children’s access to high quality education.

3. Implementation of Social Credit System’s Financial Merits in EU Countries: Framework for Using Nudging and Choice Architecture

EU authorities or private institutions in EU, can import China’s social credit system without importing its penal system and privacy ignoring data scheme. One of the underlying aims of China’s social credit system is altering the undesired behaviours into ones that are favourable by government. EU policies can achieve this by implementing shaming into their system. Main difference between the possible EU adaptations with the Chinese system might be the non-mandatory and cheap nudging which is a form of intervention (Sunstein & Thaler, 2008). Emergence of need for nudging often arises irrational choice structures. Given set of preferences are misevaluated by the economic agents and this leads to higher social costs. Authorities to address and minimize the cost of these irrational choices before they result in market failures use nudging.

Nudging is a useful mechanism for governments because there cannot be any penal sanctions for irrational choices that are legal and protected by laws in libertarian settings (Ibid, 2008). Libertarian paternalism often uses a variety of nudging schemes, most of them are about the body of the subjects. In almost every libertarian structure, authorities or institutions nudge people to make them prefer alternatives that are considered as making the people’s lives better off. Most obvious examples are on health such as, government’s efforts to reduce smoking and decreasing sugar consumption. Because these libertarian governments show paternalistic features on their governance, it is possible to add paternalism after liberalism (Thaler & Sunstein, 2003).

Nudging framework for possible EU social credit scheme might be used in several sectors like financial well-being. Credit scores aim to ensure credibility, which might increase if individuals alter their consumption habits from compulsive and put more emphasis on savings. In this regard, focusing on nurturing this behaviour by creating a default saving plans is a basic nudge strategy. Authorities may add carrots for different saving plans especially ones that refer higher saving rates later on. In that way, inertia for the saving will be established. Such carrot mechanisms might be strengthening by imposing public campaigns of the desired choice sets on people. After the cooling period, society might confirm the positive impacts of the social credit system and many people might become advocates of such system. EU social credit score agency might send some documents and distant learning materials to teach how to improve credit score. By putting positive extra points for watching these videos, agency might acknowledge their subjects by nudging.  

Moreover, nudging or choice architecture frameworks do not prohibit any actions. Nudging works only when certain undesirable behaviour is freely attainable, individuals should change their actions to other options. However, in some cases, choice architecture may restrain options for instance, smoking a cigarette at work is not forbidden, but it restrained the smoking action can only be done in a certain place. However, economic price of the smoking a cigarette costs more on time and effort (Tieffenbach, 2014).

3.1. Nudging by Shaming

Nudging also works well with the shaming mechanism. Because EU laws and governance principles does not let authoritarian legal practises for correction of irrational preferences, shaming might be the most accurate method for any adaption of social credit mechanism. Because there is a relation between moral regret and shaming. It may cause people to regret their behaviour and trigger a tendency to change undesirable behaviour in order to re-establish the relations with the society (Hay, 2001; Braithwaite, 1989). Although shaming generates a pressure over individuals, it does not physically restrain the choices and it does not impose any negative consequences. Public display in shaming has a significant impact over the avoidance. According to Eyal (2014), smoking free interiors and zoning for tobacco consumption are perfect example for such shaming. Smokers often do not want to go outside or smoking zone whenever they feel the urge. Consecutive visits to these zones by leaving workspace create shame rather than banishment. Therefore, smokers decrease their consumption and in some cases, they quit smoking.

Potential adaptation of social credit score in EU might utilize nudging by shaming by promotion of banking applications, such as having extra credits, application for credit cards in different branches or different corners in the same branches. These branches or corners would be dedicated to dealing with high risk customers. That sort of segregation might cause shaming and urges people to spend less or act in line with the social credit system’s principles to increase their social score due to the public disclosure of their situation. Besides that, putting extra procedures as the indebtedness increases, such as approval of third person in consumption might have the same shaming impact. Besides that, social credit score can contribute to the personalization of nudges. As data collection and interpretation capacity enhance, private and public institutions can nudge their subjects or customers more accurately. In terms of insurance sector, riskier customers might be exposed to the related nudges about being healthy more than the less risky types (Porat & Strahilevitz, 2013).

3.2. Shaming by Nudging

Shaming by nudging can be described as the unwanted consequences of overly restrictive policies or less restrictive policies. Mandatory actions sometimes create shaming or personal disgust due to the social, economic, and religious belief systems of the individual. According to Eyal (2014), most of the restrictive policies that are not met with the certain social criteria for some groups, shaming by nudging inevitable in the form of social exclusion. He provides an example about mandatory organ donation that is beneficial for the society is clashing with the teachings of some sects in Islam. This situation creates shame for close relatives and the person himself.

Apart from hypothetical EU case of social credit score, nudging type of actions have been used since the beginning of current credit systems in EU. Nudging often takes place in digital and social media. There are plenty of information in private or public digital channels stating the positive features of possessing higher credit scores[1].  However, people who have higher probability default and low credit scores are exposed to shaming by nudging because they cannot obtain extra credit channels (including credit cards) and cannot get the benefit of consumer campaigns such as telecom company discounts (Thomas et al, 2017; Moro& Wisniewski, 2017). In these circumstances, people with low credit score does not have other options to calculate loss and benefits and choose the best option. Under strict policies, punitive sanctions generate shaming by nudging. Forbidding internet shopping, restriction of credit card usage and rent can be regarded as underlying factors which causes shaming impact. In addition, these punitive nudges might not result in alteration of consumption habits or private financial planning. These sanctions -because an authority dictates them- may result in shaming and encourage individuals to use other options, which are not provided by policy makers. Restriction on internet shopping, renting or credit card usage might increase informal lending among friends or relatives as well as usage of loan sharks. Informal lending might cause several social and economic problems such as heavy indebtedness, social distrust, and poverty.

4. Conclusion

The idea of social credit scoring in China has emerged due to the lack of reliable universal scoring agency. Defenders of such mechanism often assert that problematic Chinese financial inclusion especially in rural and minority zones create a strong shadow banking figure that is open to systematic risks. Authorities have thought that if they would use the mobile and digital information of users including their consumption and social habits they can model their financial risks. They have appointed several private companies to improve this idea with non-mandatory social credit systems. Sesame (Zhima) Credit of Alibaba Group is one of these systems. Although, authorities insist that purpose of the program is not to increase the governmental supervision and control, universal credit scoring mechanism examples around the world suggest that it is possible to calculate credit scores of people without delving into their private life. Attachment of penal sanctions for low scored individuals who get negative scores from unadvised behaviours also support Chinese government’s attempt to create a mass surveillance mechanism. 

Usage of social credit mechanism as a universal and holistic tool for increasing financial inclusion and decreasing credit risk might not be successful as predicted by the Chinese government. Credit system might only be useful for surveillance and government control over majority due to the presence of corruption, informal credit cycles and privacy concerns. First, in this setting, it is expected that institutions and individuals would try to abuse and manipulate the system to increase their social credit score. In the regional government level, penal sanctions of the system can be used against ethnic minorities as a tool of discrimination. Secondly, informal credit cycles may not vanish, on the contrary demand for such services or mechanisms may increase due to the credit usage’s positive impact over the riskiness. Thirdly, higher internet and fintech penetration increased the concerns of privacy in China over the years. As a collectivistic society, given that corruption and informal credit cycles, Chinese citizens are aware that their private data should be kept hidden as much as possible. This will increase the tendency of taking defensive stance against social credit mechanism. Besides that, financial inclusion gain might be offset by the decreasing quality of loans due to the subprime based lending.

Moreover, adaption of social credit mechanism in EU countries without any changes is problematic due to the social and legal obstacles. Many penal sanctions and data collection methods of Chinese social credit system violate human rights and legal basis of EU social policies and regulations. These violations include right to free movement, individualization of criminal responsibility and right to respect private life. However, EU countries might import such mechanism by restrain its intensive data collection with GDPR framework. In that regard, personal information such as social connection data and consumption records may not be taken into the consideration. In addition, implementing nudging by shaming processes might have possible influence over the average social credit score of the society. Therefore, governments should avoid from putting penal and strict restrictions that may cause shaming by nudging instead of nudging by shaming. Former might result in increase in informal lending practises and decrease in financial inclusion. 

Further research papers on that issue might focus on the legal drawback of the program after its initiation in China. Results of the penal sanctions on the public and private sphere might be observed in a few years of the system’s beginning. Surveys or case analyses might give important clues to analyse the compatibility of social credit system in EU legal framework.


[1] http://www.procontra-online.de/artikel/date/2018/02/es-muss-nicht-immer-die-hausbank-sein/

http://finansiering.nutdanske.com/hvad-er-en-kreditvurdering.html

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